Policy paper

Income Tax: simplified cash basis for unincorporated property businesses

Published 31 January 2017

Who is likely to be affected

Individuals and partnerships made up only of individuals, who have a property business.

General description of the measure

Cash basis accounting (‘the cash basis’) is a simplified method for calculating taxable profits for those businesses with straightforward tax affairs.

Those with income from a property business (landlords) will be able to use the cash basis rather than generally accepted accounting practice (GAAP) to calculate their taxable profits. The new legislation will assume cash basis to be the default method of calculation, unless a landlord opts out or has rental receipts for the business in excess of the threshold in which case they will continue to use GAAP.

Policy objective

The measure will provide a simplification for those landlords with straightforward tax affairs and who don’t require accounts prepared under GAAP for any reason other to meet their tax obligations.

Background to the measure

Since April 2013, small trading businesses with turnovers below the VAT registration threshold have been given the option of using cash basis as a means of calculating taxable profits.

At Budget 2016, the government announced that it would explore options to simplify the tax rules for businesses, self-employed people and landlords. A consultation to extend the cash basis to some landlords was then held from 15 August 2016 to 7 November 2016.

Detailed proposal

Operative date

The measure will have effect for tax year starting 2017 to 2018 onwards.

Current law

Current law providing for the calculation of taxable profits for property business income is found in Part 3 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). This refers in particular to section 25 in Part 2 of ITTOIA 2005 which requires that the profits must be calculated in accordance with GAAP, subject to any adjustment required or authorised by law in calculating profits for Income Tax purposes.

Proposed revisions

Legislation will be introduced in the Finance Bill 2017 to provide for the extension of the cash basis to allow it to be used by landlords to calculate the profits of their property business where the cash basis receipts of that business don’t exceed £150,000. This will rely on some, but not all of the provisions of Chapter 3A of Part 2 ITTOIA 2005 (as amended in Finance Bill 2017). There will also be additional provisions which will apply only to those using the cash basis for property business income.

Landlords will continue to be able to opt to use to use GAAP to prepare their profits for tax purposes.

Those with more than one property business will be able to choose separately whether to use the cash basis or GAAP for each of their property businesses. Those who have an overseas property businesses alongside a UK property business will be able to make the decision about whether using GAAP is more appropriate for either. Those with a trade as well as a property business both eligible for the cash basis will be able to decide separately for each of these, and persons other than spouses or civil partners who jointly own a rental property will be able to decide individually.

Under the cash basis, capital allowances, except on the provision of cars, are not available. Instead, landlords will be able to claim the upfront cost of capital items used in the business.

As for those who do opt to use GAAP, the initial cost of items used in a dwelling house is not an allowable expense under the cash basis. The existing ‘replacement of domestic items relief’ will continue to be available for the replacement of these items when the expenditure is paid.

Interest expense will be treated consistently between those using the cash basis and those using GAAP.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022

This measure is expected to have a negligible impact on the Exchequer. The final costing will be subject to scrutiny by the Office for Budget Responsibility.

Economic impact

This measure is not expected to have significant macroeconomic impact.

No behavioural effect is expected. Frequency and the amount of landlords’ property income and expenses are regular and stable in a vast majority of cases, with little change in the amounts and timings. As such the measure doesn’t lend itself well to active tax planning.

Impact on individuals, households and families

The simplification provided by the cash basis is expected to make it easier and cheaper for landlords to calculate tax liabilities by no longer requiring them to compute profits in accordance with GAAP. It is expected that many landlords will avoid the need to carry out time-consuming accruals based adjustments at the end of each period.

The cash basis ensures that tax will not be paid on profits before the cash associated with those profits has actually been received, providing landlords with more certainty over their cash flow positions.

Some individuals and partnerships switching to use the cash basis are likely to incur a small one-off timing cost. This arises because rent is generally paid in advance of when it is due. However, over the life of the property business, taxable profits should be broadly the same using both the accruals accounting and cash basis method. Additionally, any initial small costs to individuals should be balanced by reduced administrative burdens and expense costs over the longer term. Those with substantial items left in their capital allowance pools will also have a one-off cash flow benefit the first year. There should also be a longer term cash flow benefit expected for landlords whose tenants are in arrears with rent, as they will only be taxed on income when it is actually received.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The proposals relate to an optional simplified scheme to compute business income for tax purposes and as such, no impact on the equality of protected groups has been identified.

Impact on business including civil society organisations

This measure will have a significant positive impact on businesses. Up to 1.8 million unincorporated property businesses are expected to benefit from the simplification provided by the cash basis, as it is expected to make it easier and cheaper for those businesses to calculate tax liabilities by no longer requiring them to compute profits in accordance with GAAP. The cash basis also ensures that tax will not be paid on profits before the cash associated with those profits has actually been received, providing businesses with more certainty over their cash flow positions. Businesses will incur a negligible one-off cost of familiarisation with the new rules and changing to the new basis of reporting, to reflect changes to the records which may need to be kept. On-going savings are estimated at £175,000 per year for the affected population due to removal of the requirement to carry out time-consuming accruals based adjustments at the end of each period. There is no impact on civil society organisations.

Estimated one-off impact on administrative burden (£m)

One-off impact	(£m)
Costs	negligible
Savings	-

Estimated ongoing impact on administrative burden (£m)

Ongoing average annual impact	(£m)
Costs	-
Savings	0.2
Net impact on annual administrative burden	-0.2

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

There will be IT changes needed to HMRC systems to implement this measure costing approx £150,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected on tax returns.

Further advice

If you have any questions about this change, please contact us by email: [email protected].

Declaration

Jane Ellison MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.